March 22, 2005

"Old Media" invests in "Hi-tech News Aggregation"

I am going to start a "Deal of the Day" topic if deals keep on happening at this pace...

Tony Gentile, Susan Mernit and John Battelle are buzzing about the partial buyout of Topix.net by Knight Ridder, Gannett, and Tribune. Each media house is buying a 25% stake in the Palo Alto-based startup, with management retaining a 25% ownership (and not relinquishing control). Like Moreover Technologies (Disclosure: an investment of RVC, my previous firm), Topix.net is extracting news from 10,000 sources, categorizes them and publishes them through RSS feeds for partners and clients to syndicate. A unique feature of Topix is its ability to deliverv very granular local news. The three acquirers operate 140 newspaper websites, serving 30M unique readers. Combine this audience with the ability to deliver highky targeted news, advertising and other content (user generated text or pictures, like Buzznet-powered Ventura County Star ?), and you might get a new mix of highly targeted content.

Topix.net has been self-funded by its founders, without any VC involvement. I know that the company did go up and down Sand Hill Road at some point, so this corporate investment might either be a strategic choice, or a fallback. Typical content deals are done at a 3 to 4x revenue multiple these days, but it is not clear what was priced here: technology, enabling new business models, improving the relevance of advertising,... Update: Bambi Francisco (sub req) is reporting that the investment was less than $5M, and that the capital will be used to build the technology and allow founders to pay themselves a salary.Update of the update: the maths are more challenging than they seemed.

What is interesting is that Topix is yet another Internet startup to develop a meaningful presence without any VC financing, and end up being taken out - at least partially. These exits would not make sense for "traditional" VCs that need to deploy at least $5 to $10M per deals, and need to generate at a bare minimum 3X to 5X on that capital. But it makes sense for angels and founders - and people helping them develop the shop like yours truly, who have to accept to live for some time on "Macaroni and Cheese". Alternate model ? Hmmm.Note: This is nothing new, per Om's piece from October 2004. With the dramatic reduction of bootstrapping costs (cheap bandwith, hardware, LAMP stack, etc.), it makes it easier to sustain small "feature companies" that might end up become dominant in their sector. Tim Oren had a great post on the topic last January. More thoughts on this, in a later post.